Why governments exist

It used to be that the main reason why governments exist is because of market failures. Well, that is true. Then again, it could also be because we don't live in a utopian world where we don't worry about our rights and our possessions and where we trust each other so much. That's why government exists because sometimes other people don't respect other people's rights and properties.

In their latest paper in The Quarterly Journal of Economics entitled, "Regulation and Distrust," Philippe Aghion, Yann Algan, Pierre Cahuc and Andrei Shleifer has empirical proof that this is indeed the case on why government regulations exist:

"Distrust creates public demand for regulation, whereas regulation in turn discourages formation of trust. A key implication of this model is that individuals in low-trust countries want more government intervention even though they know the government is corrupt. We test this and other implications of the model using country- and individual-level data on trust and beliefs about the role of government, as well as on changes in beliefs during the transition from socialism. In a cross section of countries, government regulation is strongly negatively correlated with measures of trust."

Sometimes in economics, it's difficult to measure preferences or values. So immediately you'd be curious as to how they measure trust. They actually use a very interesting (and ongoing) dataset, The World Values Survey (WVS):

"The WVS is an international social survey consisting of four main waves, 1981–1984, 1990–93, 1995, and 1999–2003, denoted henceforth 1981, 1990, 1995, and 2000. This survey provides a range of indicators of distrust in others, in markets, and in institutions for a large sample of countries."

So I commend the authors for an ingenious way of making use of this dataset for a subject that is quite relevant. And the message of which, of course, goes without saying. We go back to why there are institutions--why there is rule of law. These things are simply a part of why government is there. Man seems inherently not that trustworthy. And the only way for us to sleep well at night is to have these regulations in place.

Never mind if the trust wasn't there in the first place. Institutions will place that trust and make sure that that will stay in place.

Something to take note before taking that job

I think all of us have this same experience: when face with a new job prospect, we either bargain first for the salary (what we call in economics wage bargaining), or we just take the salary that is offered (what we call in economics wage posting). Of course, it also depends on the opportunity given--some who are able to would bargain for a higher salary, while other firms would offer a take-it-or-leave-it salary that would leave the employee no choice.

In their latest NBER working paper entitled, "Evidence on the Determinants of the Choice between Wage Posting and Wage Bargaining," Robert Hall and Alan Krueger points out that there are significant differences between these two types of job entrants and how they eventually end up with:

"Our analysis of the distribution of wages shows that wage dispersion is higher among workers who bargained for their wages. Wages are higher among bargainers than non-bargainers, after adjusting for the differing compositions of the groups. These results on wages support the job-ladder model: that is, workers who had the option to remain at their earlier jobs when they took their current jobs can earn higher wages than those without that option."

The authors surveyed a representative sample of 14,000 U.S. workers to inquire about the wage determination process at the time they were hired into their current or most recent jobs. One third of their survey respondents reported undergoing wage bargaining, while one third underwent wage posting.

Among their other significant findings are:

1. College graduates and those with professional training are rather unlikely to hold posted-wage jobs. Thus, wage posting appears to be much more important in the jobs that are available to those with less education.

2. Jobs held by women are more likely to have been posted-wage positions.

3. Twenty-eight percent of those who did not graduate from high school report bargaining over wages, versus 56 percent of those with professional degrees. Bargaining is also more common among minority workers (over 40 percent) and less common for women (24 percent)."

4. Among knowledge workers (those with a post-college education whose work involves problem solving) almost all (86 percent) report bargaining. Among blue-collar workers, only 5 percent report that they bargain over the wage.

5. In considering a new job opportunity, having the option to keep the current job, which about half of job-seekers do, will substantially influence one's tendency to establish a wage through bargaining. This is especially true for more educated, problem-solving workers.

6. For observationally similar workers, wages resulting from bargaining may be higher than posted wages.

7. When the distinction between wage posting and bargaining is meaningful, wage inequality among workers who accept posted wages is lower wage inequality among those who bargain.

Well, these findings are not really that surprising. It all boils down to two words: human capital. Human capital in this case can be used as leverage. The higher your human capital, the more attractive you are to employers--now you can demand higher wages.